Persons buying vehicles on credit from traditional car dealers have the option of securing an auto loan from direct lenders such as banks, credit unions, or manufacturer-finance companies. Direct lenders typically have stringent underwriting guidelines and lend only to purchasers with fair to excellent credit. Purchasers not able to qualify for traditional auto loans from direct lenders now have the option of buying vehicles from “buy-here pay-here” dealers.
Buy-here pay-here dealers buy vehicles and resell them on their lots. The dealers provide their own re-sale financing to prospective retail purchasers thereby eliminating the need for a direct lender. The dealers' financing arrangements may include payments made in installments to the dealer. Many dealers require check, cash, or money order payments be made in-person.
Because buy-here pay-here dealers finance the sale of their vehicles, they assume the risk that the purchaser will default on his or her loan obligations. It is therefore important to the dealers to evaluate the credit worthiness of the prospective purchaser to determine if the risk of default is reasonably acceptable such that a loan will be made and if so, the amount of money the dealer is willing to loan. An evaluation of a prospective purchaser's credit worthiness will also give the dealer an idea of what type of vehicle (e.g., model, make, year and condition) the purchaser can afford and how to structure the financing and down payment.
The credit worthiness of a potential purchaser may be determined by the person's credit score. The credit score is a number based on a statistical analysis of the person's credit files and in theory represents the likelihood that the person will pay his or her bills. Credit scores are often based on credit report information from the three major credit bureaus: Experian, TransUnion, and Equifax. Income is not considered by the major credit bureaus. Credit scores may be calculated using different methods. The most well known and widely used type of credit score is FICO developed by Fair Isaac Corporation. FICO credit scores ranges between 300 and 850. A lower credit score indicates a greater risk that the borrower may default on his or her financial obligations to the lender. A higher credit score means there is less risk that the borrower will default. Each of the major credit bureaus has its own credit scores.
There is a need among buy-here pay-here dealers and other more traditional car dealers for a credit survey designed to report the credit score of prospective purchasers that will enable the dealers to determine the risk of default associated with lending the purchasers money to cover the sale of the dealers' vehicles and to enable the dealers to structure the financing and down payment to ensure a reasonable opportunity for profitability. There is also a need among dealers for tracking the profitability of their sales and financing transactions.